I'm a co-founder of NorthBridge Energy Partners, LLC., a consulting firm that helps companies connect assets to power grids. I'm also a former Senior VP of Energy Technology Services for Constellation NewEnergy, Inc., and have 20+ years of experience in the energy industry. I've written for the Boston Business Journal, Mass High Tech and several other online industry publications. I have a B.A. from Williams College and a Masters from Tufts University’s Fletcher School.

Texas Power Adequacy Still A Serious Concern

For the past few years, Texas has been staring an electric generating shortfall in the face. In other competitive power markets, such as New York, Pennsylvania, or New England, the grid pays generators to build new capacity, often referred to as ‘steel in the ground.’ They essentially pay a fixed price for the power generation capacity, irrespective of whether the kilowatt-hours flow or not, to ensure it is there when called upon. Texas, being a different breed of cat, has tried a different approach. Instead of paying for the capacity to lure new generation investment, they have adopted a more free market approach of allowing the price of energy (the kilowatt-hours) to go high enough to incentivize new market entrants.

As a consequence, the Texas Public Utilities Commission last October indicated they would let wholesale spot market prices essentially double from the current price cap of $4.50 per kilowatthour. This would take place over three years, with caps going to $5.00 in June of this year, $7.00 by June of next year, and $9.00 by 2015. For comparison’s sake, the average wholesale spot market price in 2011 was 5.32 cents. So, by 2015, on the worst days when blackout are likely, hourly prices could theoretically be 170 times greater than the 2011 average. Users do not want to be exposed to spot markets on those days.

The PUC has been split on the issue of whether to pay capacity prices to incentivize new construction, or let energy markets do the trick. Unfortunately, while the latter might be the right free market approach, it doesn’t appear to have yet been significant enough to motivate builders of new power plants. Part of it is the uncertainty involved with energy prices – nobody knows where they will go and whether they will be high enough and frequent enough to adequately compensate new power plant investors. Fixed capacity prices, on the other hand, provide a clear signal.

The top US watchdog charged with ensuring power reliability doesn’t care how ERCOT solves the problem, they just want it resolved. Last week, the President of the North American Electric Reliability Council (NERC) sent a letter to ERCOT expressing it concern that there is a serious problem looming. The letter states:

“ one area of concern requiring immediate attention is the projected Planning Reserve Margin levels in the ERCOT assessment area. Capacity resources in ERCOT have drifted to a level below the Planning Reserve Margin target and are projected to further diminish through the ten-year period covered in the assessment. It is clear to me that these levels imply higher reliability risks especially the potential for firm load shed, and ERCOT will need more resources as early as summer 2013 in order to maintain a sufficient reserve margin.

These concerns are not new, as NERC has raised this issue in prior assessments…While some enhancements are being made, such as increasing the scarcity price cap, solutions have not yet sufficiently materialized to address NERC’s reserve margin concern. Further, it is still unclear to us how ERCOT intends to mitigate issues that may arise on the current trajectory and when new resources may be available to meet growing demand.”

NERC has requested a response by April 30th. The problem is, whatever solution is developed, there is a serious time lag between decision and solution. It takes years to build even a relatively quick combined cycle gas plant. For example, Panda Power Funds started building two gas-fired plants last year which they hope to bring on line in 2014.

Demand response – paying customers to reduce power consumption during the most vulnerable periods – can also help take up some of the slack. However, even getting those resources in place takes four to six months at a minimum, owing to issues around the sales process, contracts, determination of load shed capabilities, and verification.

There is no magic bullet. And there are some hard decisions to be made. Meanwhile, if the recent weather patterns hold, Texans may be in for one or more long, hot summers.

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I think this is a joining of a fundamental argument about the grid. Is it true that we (customers) want 100% reliability at any price? That seems to be NERC’s view. Or is it more appropriate that we rely on the market, experience price shocks and, perhaps rolling blackouts for a short time, and then achieve a result that provides reliability at a lower total cost as customers invest to use less / shave peaks? If we invest in generation and transmission to meet peaks that occur in only a few hours of the year, then we may wind up like Australia, with very high average costs based on the need to meet a very small number of peak hours in the year. I think it is better to let the markets work, perhaps experience some short-term pain, than it is to embrace a top down engineering solution. It is good we are warned, but we should let the markets work.

Douglas Short—”…………..I think it is better to let the markets work, perhaps experience some short-term pain, than it is to embrace a top down engineering solution. It is good we are warned, but we should let the markets work.”——-

You might have a different view if you require oxygen to breath for medical reasons……………..home oxygen generators and ventilators require electricity to run.

1) customers are all consciously aware of the trade-off being made, so that they don;t make assumptions about the level of service they are/are not getting; 2) there is sufficient lead time for all parties so that they can make the necessary changes to accommodate.

In the case of ERCOT, I see neither occurring just. The horror of the US Power Grid is all of its various jurisdictions which result in a Tower of Babel. The other side of that coin? We can run multiple simultaneous policy experiments.